Dec. 13 (Bloomberg) -- Bitcoins were dealt a blow in Norway
as the government of Scandinavia’s richest nation said the
virtual currency doesn’t qualify as real money.

“Bitcoins don’t fall under the usual definition of money
or currency,” Hans Christian Holte, director general of
taxation in Norway, said in an interview. “We’ve done some
assessments on what’s the right and sound way to handle this in
the tax system.”

Norway will instead treat Bitcoins as an asset and charge a
capital gains tax, after Germany in August said it will impose a
levy on the virtual currency.

More and more nations are taking an official stance on the
software since it emerged in 2008 as a virtual currency that’s
not controlled by any government or central bank. Bitcoins can
be used to pay for everything from hand-made rugs to window
cleaning. Students at the University of Nicosia in Cyprus can
even pay for their tuition with the software.

Paul Ehling, associate professor in the department of
financial economics at the BI Norwegian Business School, said
the government’s definition of money may be too narrow.

“Currency is any agreed upon means of exchanges of goods
and services, so you could have some small stones, as used in
history, and if it’s accepted by a sufficiently large
population, then that’s enough,” Ehling said in an interview.
“These days we do mean that a much larger group of people is
willing to exchange goods or services for this currency.”

China, U.S.

There are about 12 million Bitcoins in circulation,
according to Bitcoincharts. Users of the digital money are
finding that its wider adoption depends on policy makers and
banks as governments from China to the U.S. try to create a set
of rules to protect users.

Bitcoin exchanges, payment processors and other startups
say they need banks to connect them to the existing payments
system and provide basic services like checking accounts. To do
that, the fledgling companies must convince the regulators that
police the banks that Bitcoins aren’t being used to conceal
illicit activity.

Bitcoins’ volatility has also attracted attention and
raised questions about its viability as money.

“I don’t think you can even call something a currency if
it can change in value by 20 percent to 30 percent a day,”
Sophocles Sophocleous, a director at Argos Capital Management in
Cyprus, said in a telephone interview today. “At the end of the
day, I think people want something backing a currency.”

EBA Warning

The digital currency plunged last week after China’s
central bank barred financial institutions from dealing in it.
That followed a sudden surge in value in November after a U.S
Justice Department official described Bitcoins as a “legal
means of exchange.”

The European Banking Authority today released a warning on
the risks of using unregulated digital money that is susceptible
to hackers. “Cases have been reported of consumers losing
significant amounts of virtual currency with little prospect of
having it returned,” the EBA said in a statement on its
website. “When using virtual currency for commercial
transactions, consumers are not protected by any refund rights
under EU law.”

The price of Bitcoins topped $1,000, as speculators
anticipated broader use of digital money. The price has since
dropped to around $850 on Bitstamp, one of the more active
online exchanges where Bitcoins are traded for dollars and other
currencies. They were trading at about $12 a year ago.

Sudden Wealth

Norwegians marveled at the potential of the virtual
currency when it emerged in October that a university student
became a krone-millionaire after buying the coins. Kristoffer
Koch bought $24 worth of Bitcoins in 2009 and then forgot about
them until this year, according to Norwegian broadcaster NRK.
When he checked his investment’s value, it had soared to more
than $800,000, helping him buy an apartment, NRK said Oct. 25.

In Norway, profits from Bitcoin will fall under the wealth
tax and losses can be deducted, Holte said. There will be a 25
percent sales tax that applies to businesses, he said.

Introduced five years ago by a programmer, or group of
programmers, going under the name of Satoshi Nakamoto, Bitcoins
can potentially reduce banking-transaction fees, making it an
attractive option for trading via the Web or in stores.

Trusting Currencies

While tax revenue from Bitcoins isn’t substantial, Holte at
the Norwegian tax authority said he plans to work with other
countries to hammer out the legal aspects of Bitcoin.

Bitcoins’ survival will ultimately depend on whether
consumers and vendors decide they can trust it as a legitimate
payment form, Ehling said.

“If there’s a crisis or power outage, you need some bills
in your wallet in case your credit card doesn’t work -- same
goes with Bitcoins,” he said. “It’s sustainable if people use
it more and more, and if they trust it. People start with buying
small things, but if they start to make bigger and bigger
transactions, it could begin to challenge other currencies.
Right now, we’re not there.”